Articles

Understanding the Difference Between APR vs. APY With Harvest

0

There are hundreds of yield farming opportunities to choose from and there’s nearly $3.5B total locked value of liquidity pools in yield farming projects:

On the CoinMarketCap Yield Farming tab, you can view all of the available yield farming pools, their total value locked, token pairs, reward type, impermanent loss risk, and APY.

There is even this button:

But, whom should you really trust? The service that offers over 9000% APY? Or maybe the one offering a humble 15% APR? Notice how one says APY and others say APR?

What’s a novice yield farmer to do?

What’s the difference between APY and APR? Which is better? What should you look for? How do you know who to trust?

Don’t fret my humble farmer, I’m here to help you understand all of this and more.

In the following piece, I explain all of your yield-farming questions using Harvest.Finance – a safe and trusted high-yielding farming protocol – as an example.

What Does APY Really Mean?

APY stands for annual percentage yield. In short, it’s a percentage of return you can expect on your asset if you keep compounding it.

The keyword in this definition is “compounding”.

Compounding is when you reinvest your earnings into the original amount deposited so that your balance can grow exponentially. In other words, it can be thought of as “interest on interest” and grow your balance at a faster rate than simple interest.

The greater the frequency of compounding (the higher the number of compounding periods), the greater your value will accrue. This is sometimes referred to as the “miracle of compound interest” and is praised by legendary economists and investment gurus alike.

That said, earning an APY on your assets is an excellent way to accrue wealth and is far better than APR, which is flat interest generated on the base amount deposited with no “compounding miracle”.

Why some APYs are misleading? 

If you scroll down the CoinMarketCap Yield Farming list I linked above, you’ll notice that some yield farms display ridiculously high APYs of 300% – 1000%+:

Well, in this case, the old adage “if it sounds too good to be true, it probably isn’t”, applies to these high APYs.

Take PancakeSwap for instance. They have multiple pools paying 100%+ APYs and a pool paying over 1800% APY. To a novice farmer, these APYs appear really attractive, but to an experienced chad farmer, they know these APYs may be misleading.

Why is it misleading?

Well, remember the most important factor in APY is compounding right? The greater the frequency of compounding, the higher the APY will be.

These pools achieve high APYs by moving your deposited assets through various steps to compound the earnings with your base investment, and these steps are frequently repeated.

But why is that bad or misleading? “I thought high-frequency compounding was good? The miracle of compound interest, right?”

Unfortunately, the actions of high-frequency compounding require you to spend ridiculous amounts of gas and most humble farmers can’t afford the costs of constantly compounding.

Therefore, these high APYs don’t take the exorbitant gas fees into account when presenting these high APYs. In reality, they are much much lower and they also come with a higher risk of impermanent loss.

It’s kinda like displaying goods on a shelf with a price that doesn’t contain VAT. Some platforms do that to up their numbers and appear on the top of the aggregators like CoinMarketCap’s yield farming tab.

APYs at Harvest Finance Homepage

Harvest’s Yield Farming Strategies – Earn fAssets

As seen in the screenshot above, Harvest has a broad range of strategies with APYs from a modest 5% ranging to double digits and even triple digits.

Harvest APY is as real as it gets and harvests all assets within the strategy for you. You only need to pay gas for your initial deposit and Harvest takes care of the rest, saving you immense amounts of time and money.

fAsset Staking Pools – Earn $FARM

Once user deposits regular assets on the homepage (ie. WETH or LP tokens such as CRV:UST) they receive its corresponding fToken such as fWETH or fCRV-UST in return.

From there, users can put their fTokens to work on the Stake page OR sell them on the open market if they wish to do so.

Profit Sharing – Earn $FARM

Now for the cherry on the top.

When farming with Harvest, you’ll receive $FARM tokens atop of your harvested tokens. The beauty is that you can take these $FARM tokens and put them to the Profit Sharing Pool. (PS. If you are not interested in any particular strategy but want to participate in Harvest Finance growth in general, this is for you as well).

In this pool, stakers receive a portion of 30% of the profits generated by all strategies Harvest Finance. And the number of $FARM you receive is proportionate to your stake in the Profit Sharing Pool.

And guess what? It gets even better.

The $FARM tokens that are being paid out to stakers in the profit-sharing pool are first bought en masse from the market by Harvest Finance and this buying pressure further reduces the available $FARM supply on the market and pushes up the price as a result, as harvest programmed $FARM buying regardless of current market conditions.

When it’s all said and done, Harvest Finance has an extremely profitable yield farming system that enables farmers to maximize their gains through different forms of compounding using the above-mentioned pools.

Oh, let’s not forget that sweet APY that hovers around 100% since its inception.

What Does APR Really Mean?

Now it’s time for APR.

APR stands for annual percentage rate. In short, it’s a percentage of return you can expect on your asset with a simple interest rate over a year’s time.

The keyword in this definition is “simple”.

Simple interest is interest earned on your initial deposit and/or added capital by the depositor. With APR, the interest earned does not get reinvested to compound your interest earned.

Therefore, APR is less desirable than APY.

For example, if you deposit $100 and earn 10% APR you would earn less interest than if you deposited $100 and earned 5% APY compounded quarterly.

Conclusion

So, there you have it. I hope you learned something valuable today so that you can maximize your gains with compound interest.

From personal experience, using Harvest Finance to save BIG on gas fees while compounding the interest earned on my idle crypto assets has served me well.

I hope it serves you well too.

Elikem Codda

3 Altcoins To Keep Tabs On – AAVE, UNI, CRV

Previous article

What is a Decentralized Application?

Next article

You may also like

Comments

Comments are closed.

More in Articles